A Trader’s Guide to Today's Fed Meeting

(Bloomberg) -- The Federal Reserve is likely to juxtapose a taper announcement with abundantly dovish remarks in an effort to calibrate the market’s expectations for an eventual rate hike.

Here’s what traders are waiting to hear about from the Fed:

Taper: It would be a huge surprise if the Fed defers the taper announcement to December considering how well policy makers have flagged the move. The question will essentially come down to the start date. In all likelihood, the monetary authority will begin its reduction in November, amounting to $10 billion a month in Treasuries and $5 billion in mortgage-backed securities. That would put the Fed on course to be done with its taper by the middle of next year.

Statement: Apart from cosmetic changes at the top regarding the evolution of the virus, here’s how the key part of the statement may change. (As it did in December 2013, the Fed may issue a separate statement on how it plans to implement the changes to the pace of purchases):

Dovish conference remarks: Chair Jerome Powell may push back on market pricing for rate hikes in 2022 without committing himself to any particular date. He will emphasize that Fed policy isn’t on a pre-set course and that there is still plenty of risks to the economy and uncertainty regarding the evolution of the virus. If he doesn’t push back on that pricing, that would be hawkish enough to cause a further flattening of the curve.

Balance-sheet reduction: He may also be asked about a time line for a reduction of the Fed’s humongous war chest that has grown at an alarming pace of $1 million a minute. His response will be that there’s plenty the Fed has to address -- taper being the first -- before thinking about its balance sheet.

• NOTE: This was a post on Bloomberg’s Markets Live blog. The observations are those of the blogger and not intended as investment advice. For more markets analysis, go to MLIV.

©2021 Bloomberg L.P.